MLPs opened with 3 straight negative days again this week. By Wednesday, the MLP Index had dropped 2.6% from last Friday. MLPs rallied 2% combined Thursday and Friday to finish down 0.8% overall, but with some positive vibes into the weekend, especially with actual snowflakes falling in Houston Friday (from what I understand).
Oil prices seemed to drive price action more than we’ve seen in recent weeks. MLPs were in-line with utilities and underperformed broader equities. Natural gas prices were hammered Thursday on a surprise inventory build. Ethane was dragged down with gas prices, while propane prices held up. Propane has become a global market and appears significantly tighter than the more regional markets for residue gas and ethane.
There was a big MLP conference in New York, a few refinery analyst days where subsidiary MLPs got some attention, and initial 2018 guidance from KMI and WES. Expect news flow to lighten up considerably starting next week. The ENB analyst day and implications for SEP, EEP/EEQ, DCP and maybe PSXP should be the last scheduled news event of 2017.
Unit Count: This Time is Different (excluding dilutive IDR take outs)
One big hope for 2018 is new demand for MLP units shows up when the calendar turns. Part of attracting fresh interest in the sector is an expectation that new demand for MLP units won’t be offset by a wave of newly-issued MLP units, so talking down issuance and unit creation is important these days. MLP unit supply can be constrained by a lack of equity issuance or by MLPs eliminating units via buybacks and via mergers.
MLP management teams recognize the market’s current disdain for equity needs of any kind, and have tried to position to be able to commit to no equity issuance in 2018. The majority of MLP and midstream companies by sector market cap (64% by my count) have said they will not issue common equity in 2018.
Relying on MLPs to be their own governors of capital markets activity hasn’t always played out well (akin to leaving your kid “home alone” with access to ice cream.
MLP management teams could change their minds and issue equity to fund a new project or acquisition that comes along. They also might decide to issue equity if their stock price has traded up to a point where equity issuance is attractive.
But this time could be different as re-building management team credibility is a priority, cash flow per unit is a focus, and institutional investors are demanding more transparency and accountability from management teams.
The other way to restrict supply of MLP paper is by reducing the number of securities out there via consolidation. Folks lament the lack of consolidation in the sector, but 8 midstream MLPs were consolidated in 2017. Many of those involved intra-company transactions (WNRL, OKS, SXL, VTTI, PTXP, MEP), but there are fewer MLPs today than there were at this time last year, a positive trend.
I expect accelerating consolidation in 2018, for a several reasons:
On the other hand, consolidation can be painful and disruptive (see MWE, WMB, etc.), and is a risk for potential acquirers that trade at premium multiples. Other impediments are entrenched management teams intent on building their own empires rather than merge.
To summarize, demand for MLP units remains challenged, but 2018 could represent a slowdown in the expansion of MLP paper that offers some technical support as the calendar turns and as fundamental tailwinds continue.
Winners & Losers
With the exception of CEQP, the top 5 had no news this week, but stocks tend to move around major energy conferences where MLPs get to tell their respective stories. There was some discussion at the conference of potential DJ Basin oil pipeline conversions into NGL service that could benefit the likes of NGL Energy with oil pipeline capacity. No news among the bottom 5 either.
HESM gave back some of its gains from last week. On the YTD leaderboard, NS was replaced on the bottom 5 by CELP.
General Partners and Midstream Corporations
SEMG led midstream corporations and general partners for a second straight week, and KMI reacted positively Friday to news of the ruling in Canada on the Trans Mountain Pipeline discussed below. NSH extended its loss leadership within this group, perhaps on the change in tone from management on evaluating its distribution strategy, and a more likely cut for NS means less cash flow for NSH distributions.
SEMG and AMGP each climbed a spot on the bottom 5 YTD performers. OKE climbed a couple of spots on the top 5 list, but there are still just two of the group positive for the year so far.
Canadian Midstream Corporations
Not as much volatility among Canadian players this week. KML was volatile, trading up sharply Friday after a positive ruling related to the Trans Mountain Express pipeline, but had traded off earlier in the week as KMI talked down that very same project in its guidance release.
On the Canada YTD leaderboard, ENB climbed 2 spots from the cellar.
News of the (MLP) World
No preferred or common MLP equity offerings this week. It would be a surprise to see another equity offering attempted this year, and a major surprise to see an IPO launch. There were some debt deals, and a couple of shelf registrations filed this week, gearing up for next year. Also, the Canadian capital markets continue to function well; ENB raised $400mm in a preferred offering.
Growth Projects / M&A